HomeMy WebLinkAbout05. Receive 2022 annual Deferred Compensation Report Page 1 of 15
Item 5.
CENTRAL SAN BOARD OF DIRECTORS
POSITION PAPER
MEETING DATE: MARCH 2, 2023
SUBJECT: RECEIVE THE 2022 ANNUAL DEFERRED COMPENSATION REPORT
ENCOMPASSING CENTRAL SAN'S 457(8) DEFERRED COMPENSATION,
401(A) MONEY PURCHASE, AND HEALTH REIMBURSEMENT
ARRANGEMENT PLANS
SUBMITTED BY: INITIATING DEPARTMENT:
KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION-FINANCE
REVIEWED BY: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION
Roger S. Bailey
General Manager
ISSUE
The Deferred Compensation Plan Advisory Committee respectfully submits its 2022 Annual Report.
BACKGROUND
Deferred Compensation Advisory Committee Background
Central San's Board of Directors (Board) approved the establishment of the Deferred Compensation Plan
Advisory Committee (DCAC) in January 1982. The scope of activities of the DCAC includes:
• Establishing internal administrative procedures
• Educating participants regarding the Plan
• Fiduciary Oversight of the Plan
• Review and approve emergency withdrawal requests (unless delegated to the recordkeeper)
• Reviewing investment performance of the Plan
• Submission of an Annual Report to the Board of Directors and Plan participants
The DCAC is comprised of seven members. The DCAC is designed to be representative of plan
participants and generally be comprised of employees across the various non-management employee
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negotiating groups and organizational departments. The two non-management employee negotiating
groups that are represented are the Management Support/Confidential Group (MSCG) and the
Employees'Association Public Employees Union, Local One (Local 1). The Finance Manager serves as
the DCAC Chair and Plan Administrator facilitating meetings of the DCAC and serving as Central San's
primary contact with the recordkeeper, currently MissionSquare Retirement (previously known as I CMA-
RC). With the exception of the Committee Chair which serves a permanent term, DCAC members are
appointed by the Directors of their respective departments when a position vacancy arises due to term
expiration or resignation.
Deferred Compensation Advisory Activities
In accordance with its Administrative Procedures, the DCAC met on a quarterly basis in 2022, meeting in
the months of February, May,August, and November. Once approved by the DCAC, minutes from past
DCAC meetings are posted on Central San's website under:
About > Financial Information > Deferred Compensation Advisory Committee.
Throughout 2022, the DCAC and staff conducted extensive efforts to improve the strategic design of and
fiduciary oversight over the Plan through the implementation of best practices issued by the National
Association of Government Defined Contribution Administrators (NAG DCA). The most significant
accomplishments of the DCAC in 2022 included the following:
• Plan Administration - Hired an independent outside expert to serve as the Plan's Employment
Retirement I ncome Security Act, or"ERISA," Section 3(21)fiduciary advisor to assist the DCAC in
fulfilling its fiduciary oversight obligations (i.e., independent plan performance reviews, fiduciary
training, participant retirement education, plan design, recordkeeper accountability, etc.). The advisor
selected was the firm "NFP".
• Plan Governance and Administration - Reviewed and modified existing governance documents
to implement best practices such as:
• Designing and implementing an Investment Policy Statement as part of the internal
Administrative Procedures; and
• Establishing DCAC investment and plan governance sub-committees with retiree
representation to ensure new concepts are vetted prior to being brought to the DCAC for
action.
• Plan Structure & Design -With the guidance of the DCAC's 3(21)fiduciary advisor, the DCAC
designed a revamped core investment lineup structure in an "efficient fund menu" design in-line with
NAG DCA best practices to help reduce fiduciary risk and improve participant outcomes through the
elimination of redundant, higher risk, and higher cost investment fund options.
• Participant Engagement - Outreach to plan participants throughout the year providing progress
updates on the rollout of the new core investment lineup menu including the following:
• Publication of three Lateral Connection articles in July, September, and December, which
targets both employees as well as retirees;
• Board presentation on the various fiduciary responsibilities associated with the Plan and how
those responsibilities are being met (August 4, 2022); and
• Employee training on efficient menu design benefits, how the the Plan's performance is
monitored, and other general fiduciary obligations (July 27, 2022).
The DCAC met most recently on February 6, 2023, in a regularly scheduled quarterly meeting to discuss
the annual performance of the Plan as well as conduct regular business of the DCAC (i.e., review quarterly
Plan results, review participant educational/outreach efforts, review DCAC membership, etc.). Beyond
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reviewing and approving a draft of this Annual Report, two of the more significant topics covered at this
meeting were (1) approval of Plan's new core investment menu for rollout and (2) approval to bring a
revised Administrative Services Agreement with the Plan record keeper to the Board for approval.
One of the first observations by the DCAC's 3(21)fiduciary advisor was that Central San's Plan had an
unusually and overwhelmingly large number of funds in its core investment menu. While the retirement
plan industry has moved towards a more streamlined model for investment menu design, Central San's
Plan offered an astounding 100 fund options. Per NAGDCA best practice publications, a number of
studies have shown that while a small minority of plan participants take advantage of expansive investment
menus, a much larger portion of participants suffer from a phenomenon called "decision paralysis."
NAGDCA best practice guidance goes on to state that beyond improving the participant experience,
offering fewer fund options have several other benefits including: (1) reducing the oversight and due
diligence burden on plan sponsors, (2) potentially reducing fees through the pooling of assets, and (3)
making selection of asset classes easier.
After several meetings to examine this issue further, the DCAC, with the guidance of its independent 3(21)
fiduciary advisor, designed and approved a new core investment menu intended to serve as an "efficient
fund menu" as described previously. The end result is a lineup that offers only highly benchmarked fund
options in a more simplified and strategic fund design that eliminates fund redundancies, helps reduce the
previously-described participant "decision paralysis", and offers quality fund options with lower expense
ratios than what was previously offered. As illustrated in the attached presentation provided to the Finance
Committee, the new core menu will offer a lineup of 25 quality investment options for plan participants.
While it is more than the quantity offered by many other agencies as well as the "basic 15" fund lineup
pursuant to the 5-4-3-2-1-0 "efficient fund menu" proposed by NFP initially, it is a significant improvement
from the overwhelming number of options provided previously (4 times smaller, yet still diverse). To
highlight the potential savings of the new fund structure, using January 2023 Plan assets as a basis, it is
estimated that savings from reduced Plan expense ratios will yield annual savings to participants totaling
$335 thousand, or approximately$1.675 million over 5 years. Regarding transition timing, while the
exact dates are still uncertain at this point, it is projected that the official fund lineup change communication
letters will be issued by the recordkeeper on or around March 15, 2023 and that the fund lineup updates
and mapping to new plans would occur on or around April 21, 2023.
Coinciding with the approval of a new core investment menu, the DCAC has also been working with its
3(21)fiduciary advisor to review the Plan Administrative Services agreement with Mission Square for
record keeping services. At its February 6, 2023 meeting, the DCAC approved revisions to the existing
Plan Administrative Services agreement to be brought to the Finance Committee and Board at a later
date. Beyond allowing for an open architecture core lineup design, the DCAC intends for the new
Administrative Services agreement to more properly reflect the needs of Central San regarding DCAC
and participant education, Plan performance reviews, loan and unforeseeable emergency withdrawal
processing, retirement consultations, on-site visits, and other key services. It is anticipated the new
Administrative Services agreement will be brought forth to the Board Finance Committee for review in
March 2023.
Annual Report on Plan Performance for Calendar Year 2022
The attached presentation (Attachment 1) shows the current value of assets, segmented between the
457(b), 401(a) and HRA plans. The report also shows the distribution of assets by investment type for
each sub-plan, a trend analysis line chart showing the changes in total market value over the previous five
years, and the diversification of assets between seven investment type categories in that same five-year
period.
Central San's record keeper provides participants a variety of investment alternatives across various asset
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classes, with the selection of the asset mix being the choice of individual participants. In the aggregate
across all plans, participants continue to have a relatively large share of assets in the Stable Value/Cash
Management plan at 27.2%, which is a sizable increase from 18.9% one year ago. One explanation for
this relatively conservative distribution of assets is that Central San's participant profile is comprised largely
of an older workforce and retirees, both with a core defined benefit pension program. Additionally, volatile
market conditions during 2022 likely reduced participants' willingness to take on equity risk, shifting
retirement assets to more conservative options. And, given losses in the more aggressive investment
areas, the Stable Value/Cash Management became a relatively larger portion of the total portfolio as it did
not shrink from investment losses while the other options did. Despite this observation, Central San Plan
participants continue to invest most heavily in U.S. Stocks overall, making up 33.7% of the total portfolio
compared to 37.9% one year ago. With all the market volatility caused by inflation, Fed interest rate hikes,
and supply chain instability, 2022 was a tremendously difficult year for investors. Unfortunately, Central
San's Plan was no exception, reporting an aggregate loss of 14.6% with a market value of$149.8 million
as of December 31, 2022. Despite the market turmoil however, Central San participants continued to
make steady contributions to retirement accounts, with contributions to the Plan totaling approximately$6.2
million in 2022, an increase from $5.8 million in 2021.
In conjunction with its transition to the CaIPERS Health Benefits Program effective in Fiscal Year(FY)
2019-20, Central San implemented a Health Reimbursement Arrangement (HRA), maintained in by the
record keeper in a RHS account for Retiree Health Tier I I I employees of Local 1 and MSCG, excluding
the Management Group and unrepresented employees. Central San contributes 1.5% of base salary for
each eligible employee to be used for for eligible I RS qualified medical expenses post District
employment. Accordingly, Central San entered into an agreement with its recordkeeper to open and
administer an RHS account for its newly established HRA. To provide an opportunity for Management and
Unrepresented employees to take advantage of this useful retirement tool, during 2022 Central San
opened an additional HRA account to be funded solely by mandatory employee contributions. I n total, the
HRA plans reported a total market value of$1.01 million as of December 31, 2022. During 2022 there
were total employer contributions of$309,791 and investment losses (excluding fees) of$149,990.
Education and Outreach to Plan Participants
At the onset of 2022, Central San coordinated with its recordkeeper to rollout a financial wellness seminar
program to educate employees on important and trending retirement topics. Eleven seminars, facilitated
by the recordkeeper, were held conveniently during the lunch hour and in a virtual format for employees to
attend. Remote education and consultation efforts continued to be available to and benefit participants in
2022.
1 n addition to the aforementioned organized educational and outreach effort for 2022, Central San's
recordkeeper continued to offer monthly recurring "virtual" face-to-face meetings with an Retirement
Planning Specialist (RPS). These one-on-one meetings allow employees the opportunity to learn about
the recordkeeper's online tools, discuss retirement planning strategies and investment options, and make
investment strategy and allocation changes. Central San's recordkeeper also continued to offer one-on-
one virtual meetings with a Certified Financial Planner(CFP), allowing participants to design and map out a
financial plan and retirement strategy that is unique to their own situation. These meetings continued to be
popular with participants in 2022, where there were 62 one-on-one RPS consultations and 22 CFP
consultations.
ALTERNATIVES/CONSIDERATIONS
None.
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FINANCIAL IMPACTS
The Board's acceptance of the Annual Report for 2022 does not have any direct fiscal impact to Central
San.
COMMITTEE RECOMMENDATION
The Finance Committee reviewed the 2022 Deferred Compensation Plan Annual Report at its February
21, 2023 meeting and recommended Board receipt.
RECOMMENDED BOARD ACTION
Receive the Annual Report of the Deferred Compensation Plan Advisory Committee for 2022.
Strategic Plan re-In
GOAL THREE: Workforce Diversity and Development
Strategy 3- Retain skilled workers by investing in resources and opportunities for all employees to grow and thrive
GOAL FOUR: Governance and Fiscal Responsibility
Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility
ATTACHMENTS:
1. Report presented to Finance Committee
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February 21,2023
Deferred
Compensation
Advisory Committee
Annual Report
Calendar Year 2022
T. Kevin Mizuno `
Finance Manager
1
Table of Contents .
I Background �-
DCAC Activities in 2022
Performance Highlights
z Education and Outreach -
Efforts --
Overview of New Core
Investment Lineup - \ -
1 � I
1
2
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Page 7 of 15
/
Background
�i
Deferred Compensation Advisory i
Committee (DCAC) established by Board
in 1982 /
Comprised of seven members appointed
by Department Directors
DCAC membership designed to be
representative of workforce, including
both Local 1 and MSCG
Finance Manager serves permanent
term as Chair and Plan Administrator
3
Plan Composition
Deferred All full-time permanent employees
Compensation Plan Voluntary employee contributions only
p�
Money All full-time permanent employeesPlan £
• Employer contribution of 6.2%up to statutory social
security income caps
Health Reimbursement • All Tier III full-time permanent employees
Arrangement (HRA) • Employer contribution of 1.5%of base salary
!' r
• Management&Unrepresented at-will Ij
HRA Plan 11 • Varying mandatory employee contributions,contingent
on group,hire date,and income bracket
4
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OversightFiduciary
DCAC Scope
Co-fiduciary to Central San Board over Annual ReportProcedures
Plan
Annual communication to Board I
Scope of DCAC defined in the Deferred
0ompensation Plan Board Policy(BP
Investment Policy Statement (IPS) and Plan Participant
Education Policy Statement contained
rmance
within Administrative ProceduresMonitoring•
Approval of Unforeseen Emergency
Withdrawals can be delegated to
recordkeeper Emergency
WithdrawalsI
5
DCAC Membership
0 up
I Arellano,Grace** Administrative Services Operations MSCG 12/31/24** **
Assistant
2 Lyon, Amal Accountant Administration Local 1 12/31/23 1
3 Lawson,Dana Senior Engineer Engineering MSCG 12/31/25 **
4 Mercerjustin Instrument Technician Operations Local 1 12/31/23 1s�
5 Mizuno,Kevin Finance Manager
6 Niswander,Geoff Senior Household Hazardous Engineering Local 1 12/31/25 **
Waste Technician
7 Thomas,Christopher Accounting Supervisor Administration MSCG 12/31/24 2nd
*Committee Chair position is title-specific and not employee specific. Finance Manager position serves as Plan
Administrator and Committee Chair.Term limits do not apply.
**Appointed to complete term of predecessor by Department Director.
I
6
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DCAC Activities &
Accomplishments
1111111111111111111111111111
Plan Plan Governance Plan Structure& Participant
Administration Design Engagement
• Soliciting and Investment policy Designed and Lateral
retaining an statement approved efficient Connection -
independent development fund menu publications(3)
outside expert to Creating investment lineup Board
serve as 3(21) investment and for Plan Presentation on
fiduciary advisor plan governance fiduciary role
sub-committees Employee training _
with retiree on core menu
representation changes
7
New Core
Investment Menu
New structure in-line with best
practices issued by National Savings to
Association of Governmental Higher participants
Deferred Compensation benchmarked
Administrators (NAGDCA) • funds for
Alleviates participants
Reduces overwhelming and unusual fiduciary risk
fund choices from 100 to 25 and burden
Projected to generate up to $1.675 Reduces
participant
million in savings to participants "Decision
through lower expense ratios over 5 paralysis"
years
IL
oil
8
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Overview of New Core
Investment Lineup Active International(1)
Total of 25 options, compared to 100 offered F, Specialty(2)
previously
22 basis point overall reduction in fund expense Active Fixed Income(3)
ratios
Self-directed brokerage option retained for Passive Index(4)
participants outside of core lineup
Target Date Funds separated into 5-year retirement Active Equity(4)
increment group anning 2010 through 2060
�r Target
low
a
Blend Growt
Large Cap Large Cap
Value 11 Growth III 11
(Putnam (AB Large
• • • _ _• LCV) Cap Growth)
Small Cap Small Cap
Value III 11 Growth II 11
(PIMCO (AB Small
RAE) Cap Growth)
�*43 CENTRALSAN
<EI-1C-TRICOSI s.H-1 DSivKr
1
Page 11 of 15
Value Blend Growth
Passive / Index r : ;_ Equity
Funds
a BlackRock Russell0
E
Four funds offered in passive/ "
CL
index fund category
Each fund offered scored highest Int.Value Int.Blend Int.Growth
rating possible (10) by 3(21) BlackRock MSCI ACWI ex-US
fiduciary advisor
E
"
Core Fixed Income Fixed Income Cash Equivalent
11
Active Fixed Income
OtherFunds Core Fixed Income Fixed Income Cash Equivalent
- _
Three funds offered in active fixed PLUS Fund Class
oncome fund category Fixed Income R6 R1
One fund offered in active
international equity fund category Active International Equity
Additionally,two specialty funds value Blend Growth
include:
11(Fidel ity Intl Cap
Real Estate Investment(Cohen & b
Steers Realty Shares Q
Retirement Fixed Income Fund
(MissionSquare Retirement "
IncomeAdvantage Fund 115)
12
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Self-Directed Brokerage
Option
Will continue to be offered outside of core investment
lineup
Designed for knowledgeable investors who wish to invest
outside of the core lineup
Central San not fiduciarily responsible for investments held
in self-directed brokerage accounts
Minimum balances and administration fees apply
13
Next Steps -
,
Official fund lineup change letter
communications to be issued by Mission �' �*
Square on/around March 15, 2023
Fund lineup updates and mapping to
new plans on/around April 21, 2023 y
New Administrative Services agreement
with Mission Square to be presented to
Board for approval reflecting new open �..
architecture design and services needed "
14
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Annual Report
Highlights SUMMARY DISTRIBUTION BY
INVESTMENT TYPE
Specialty
Assets in 457b plan make up 57% International/Global 739% Stable Value/Cash
of Plan assets,while 401a Plan is stock ` Management
approximately 42% 3.70% OGuaranteed 27.18%
Largest share of plan assets is in
U.S. Equities
Assets in Stable Value/Cash U.S.Stock
Management continue to make up 33.65% —Bonds
large portion of plan assets _ 7.37%
Balanced/Asset Lifetime Income
Allocation 3.53%
17.18%
1
15
Annual Report Total Market Value of Plan Assets as of
Highlights $200,000,000 December 31 It
Market value of Plan declined $180,000,000 $175,257,995
approximately 14.55%from the
prior year $160,000,000 $152,767,496 $149,761,621
Market turmoil in 2022
attributable to several factors such $140,000,000 $126,296,802
as supply chain disruptions,
inflation,and Fed interest rate $120,000,000 $106,721,447
hikes
Total contributions into plan were $100,000,000
$6.3 million
$80,000,000
2018 2019 2020 2021 2022
16
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Annual Report
Ratio of Investments by Type:
Highlights Central San's ICMA 457 and 401(a)Plans
45.00%
US Equities consistently the largest 40.00%30.00%
asset class in Plan
30.00%
Decrease in relative proportion of 20.00%
US Equities offset by large increase 20.00%
in Stable Value/Cash 15.00%
Management category 10.00%
Reduction in fixed income asset 0.00%
00% ���
class despite Fed interest rate 0. F` caS Fa
hikes throughout 2022 r o° ��d° a
GaS Fa �P J' �°o SQ
Little change in Guaranteed .tee ;re` 55a a�
Ja za ea�P `°c
Lifetime Income,Target Dates,or
International Equities
■2018 ■2019 ■2020 ■2021 ■2022
I
17
2022 Education & Outreach
to Plan Participants
Coordinated effort Financial wellness
seminar with Mission Square to educate
participants on important and trending
retirement topics
Held 11 seminars, facilitated by Mission
Square
Retirement Plan Specialist held 62 oP
virtual one-on-one meetings with moo!
participants
Certified Financial Planners held 22 one- ' k
on-one consultations with participants
RCENTRALSAN
18
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Page 15 of 15
Discussion &
Questions
19
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